Down Payment: You Need One, Start Saving

When 30-year-old Kimberly Palmer, and her husband, Sujay Dave, purchased a townhouse this year in a suburb of Washington, D.C., they may have seemed like typical first-time homebuyers. Young, educated and hard-working, the couple also had a newborn daughter, Kareena.

But they were different from most first-time homebuyers in a critical way. They were able to come up with a 20 percent down payment -- $143,000, to be exact -- to buy their dream home. And they amassed that down payment the old-fashioned way: through years of saving, sacrifice and smart financial decisions.

Five years ago, amid the housing boom, 43 percent of first-time homebuyers had no down payment. Though that figure shrank to just 15 percent in 2009, mainly due to tighter lending practices, the overwhelming majority of first-time homebuyers still struggle to put 20 percent down.

According to the National Association of Realtors, the typical homebuyer (including first-timers and repeat buyers) had an average down payment of just 8 percent in 2009, the latest period for which full-year data is available. For first-time buyers, the average down payment was even smaller – just 3 percent. And first-timers accounted for 47 percent of all homebuyers in 2009, a

record high. Yet many of those first-time buyers used government-insured FHA mortgages, which only require a 3.5 percent down payment. In 2009, nearly 40 percent of all mortgages were FHA loans.

For Palmer and Dave, their road to homeownership started after the couple graduated from college.

Unlike many 20-somethings entering the workforce, Palmer and Dave continued to live like college students until they were in their late 20s. For five years, they didn't buy many new clothes, decided to have one car instead of two, and kept the same one-bedroom apartment -- right down to the same well-worn futon they'd had while in graduate school. "We were so frugal," Palmer recalls. "We barely drove, cooked almost all our meals, and rarely splurged on anything. Even after we got new and better jobs, we didn't upgrade our lifestyle so we could just save more money instead."

Those five years of saving paid off in January, when the couple closed on a 2,400-square-foot townhouse that cost $715,000 and features three bedrooms and 3½ bathrooms. The home's Bethesda, Md. location – just across the border from the nation's capital – is an added bonus.

Asked whether she recognizes how unique she and her husband are, Palmer acknowledges that their accomplishment took hard work. But she thinks that they are part of a growing breed of young, first-time buyers who are more fiscally conservative because they've spent their entire adults lives dealing with economic downturns – first after the Sept. 11 attacks and more recently during the Great Recession.

Her generation, Palmer says, is keenly aware of the fact that millions of Americans are struggling with house payments that they can not afford, and that one out of four U.S. homeowners is underwater or facing foreclosure. As a result, many of her friends are also buckling down to save over the long haul for a home – rather than rushing into homeownership with a small down payment.

"From our conversations, it seems like they all agree it's better to put 20 percent down, just to minimize the risk of being overly leveraged in your home," Palmer says.

"That's a goal a lot of my friends have," she adds. "It might mean waiting longer to buy, though -- that's the sacrifice."